I’ve come across a phenomenon numerous times over the years, again recently, that reveals the purpose of and resistance to discharge as the ultimate solution/relief for bankruptcy.
The writers observe that, if a judgment debtor is found by the court enforcement division to have no available assets against which to collect a judgment, the enforcement action is terminated … but “the court will automatically check every six months whether the involved judgment debtors have a new property.” On the one hand, the termination of fruitless enforcement actions sounds something like bankruptcy relief. Assuming the process actually works like this, and assuming the court enforcement division is not overly aggressive in pursuing “new property,” this seems to me to take some of the pressure off of the Chinese system to adopt a proper bankruptcy discharge to alleviate the suffering of insolvent judgment debtors.
On the other hand, without a discharge, the “checking for new property” part ensures that debtors’ incentives to be productive will remain perpetually depressed, and official resources will be perpetually wasted in interminable pursuit of phantom new assets. These debtors’ productivity and entrepreneurialism is forever lost to Chinese society in an era in which global competition continues to heat up.
This temporary-respite-in-anticipation-of-new-wealth approach to insolvency is also the “plan B” approach in another country that lacks a bankruptcy discharge: Switzerland. Here again, we see the half-solution of giving creditors a “Konkursverlustschein“–a certificate of debt remaining unpaid after bankruptcy proceedings–that becomes enforceable only if the debtor is shown to have obtained non-exempt “new wealth” in a (widely varying) amount deemed sufficient by various courts.
A great article (in German) explains the many, many shortcomings of this system and advocates for the adoption of a Swiss discharge provision. But again, it occurs to me that the existence of this bankruptcy-lite of a temporary–and often quasi-permanent–prohibition on further enforcement until creditors demonstrate the debtor’s acquisition of “new wealth” neatly explains why Switzerland remains a no-discharge island in a sea of European countries, all but one of which have adopted discharge laws in the past few decades (and that last one, Bulgaria, is seriously considering this now, perhaps in light of the imminent adoption of an EC Directive on Second Chance forcing the issue).
It also reflects a very long history of this plan-B approach to individual financial distress, long predating the discharge eventually introduced in English and American law.
The Roman and medieval European cessio bonorum also are generally thought not to have offered debtors a discharge in exchange for relinquishing their property to creditors. Likewise, the classical Islamic law of bankruptcy (iflaas) recognized a respite for overextended debtors only “until ease,” not a discharge (without creditor consent), as creditors were allowed to continue their pursuit of repayment once the debtor acquired assets beyond the bare essentials.
The persistence and gradual extinction of the plan-B temporary respite reveal both the long history of compassionate attitudes toward overextended debtors and a backstop that seems to support modern reluctance to go the whole nine yards to a full discharge. It also allows us to contrast the types of societies who have and have not accepted the utility/necessity of discharge, as the former recognize that every debtor’s productivity is vital for local societies’ global economic competitiveness. When the focus shifts from the micro to macro, only then is plan B revealed to be an insufficient substitute for discharge.
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Deleveraging Is Over
Posted:2019-02-26 17:39:11 UTC-06:00
An unsustainable run-up in consumer housing debt and other debt was a fundamental structural cause of the 2008 global financial crisis.
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Following four years of painfully slow decline, total U.S. consumer debt has now risen back above its 2008 peak, with the growth led by student loan and auto loan debt. Mortgages outstanding are not quite at their 2008 levels, but student loan and auto loan growth more than makes up for the modest home loan deleveraging.
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Americans are back up to their eyeballs in debt, but now some of the debt burdens have shifted from baby boomers to millennials. While the cost of health care may be a key electoral issue for the over-50 crowd, under-40s will be listening for policymakers to offer solutions on student loans.